Air Canada profit flat on new aircraft

10 August 2007

Air Canada reported net income of $155 million for the second quarter of 2007 compared to net income of $152 million in the second quarter of 2006. Net income for the quarter included gains on the revaluation of foreign currency monetary items of $160 million, compared to $108 million for the prior year’s quarter.

The airline reported operating income of $88 million, a decrease of $25 million from the operating income of $113 million recorded in the second quarter of 2006, mainly due to costs related to the introduction of new aircraft and the maintenance preparation for outgoing leased and subleased aircraft. The increase in these costs over the prior year’s quarter amounted to $21 million, which was partly offset by sublease revenues of $6 million recorded in the second quarter of 2007. These transitional fleet costs will be offset by lower fuel and maintenance costs driven by more efficient aircraft being brought into the fleet, as well as increased sublease revenues in future quarters.

Passenger revenues increased $74 million or 3 per cent over the second quarter of 2006 mainly due to traffic growth of 3 per cent on a capacity increase of 2 per cent. RASM rose 1 per cent compared to the second quarter of 2006. The passenger revenue increase in the quarter was partly offset by a $19 million reduction in cargo revenues mainly due to reduced dedicated freighter capacity. EBITDAR(1) amounted to $295 million, a decrease of $19 million from the same period in 2006.

Unit cost, as measured by operating expense per ASM, increased 1 per cent from the second quarter of 2006. Excluding fuel expense, unit cost grew 2 per cent over the second quarter of 2006, largely driven by increases in wages and salaries, fleet introduction and aircraft return and subleasing costs.

The solvency deficit in Air Canada’s Canadian registered pension plans improved from $1,655 million at January 1, 2006 to $542 million at January 1, 2007 as a result of a 13.6 per cent return on pension plan assets (net of expenses), significant company contributions to plans, and a stable interest rate environment in 2006. This improvement will result in a reduction to Air Canada’s pension plan cash funding obligations in 2007 and is expected to do so in 2008. The required contributions to Canadian registered plans is reduced by approximately $115 million in 2007, and is projected to be reduced by $150 million for 2008, based on the January 1, 2007 actuarial valuations compared to the valuations of the previous year.

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“Our revenue performance for the quarter was encouraging mainly due to strong domestic Canada and Asia Pacific markets,” said Montie Brewer, President and Chief Executive Officer. “We were able to effectively manage capacity in North America to mitigate softness in the U.S. However, the U.K. market under performed due to increased industry capacity while travellers continued to be impacted by additional security measures and the doubling of the U.K. departure tax. We expect these trends to continue, including a strong domestic Canada market. The arrival of our Boeing 777 aircraft will allow us to shift capacity from the U.K. to the Asia Pacific region in order to maximize asset utilization. Looking forward, bookings remain strong which we expect will result in continued unit revenue improvement.

“The significant reduction in solvency deficit for our employee pension plans in Canada, ahead of schedule, is excellent news for our employees and shareholders. Past service payments will be substantially reduced this year and we expect next year as well, while at the same time the Corporation’s carrying costs will be reduced going forward.

“There is still much work to be done. However, we have made progress in creating a solid foundation for sustained profitability. We accomplished a great deal in the quarter and we are anticipating a much improved second half.

“In the quarter, we put into service the first four Boeing 777s. As of today we have received seven Boeing 777s of a committed 17. These aircraft will provide capacity in the second half of 2007 with substantial fuel and maintenance savings.

“Second, the significant increase in salaries and wages expense reported in the first half of 2007 is expected to ease in the second half of the year due to lower costs associated with overtime, wage progression, training and voluntary separation packages.

“Third, our hedging program has locked in 52 per cent of our fuel requirements for the remainder of the year at favourable prices. This, together with a stronger Canadian dollar and based on today’s current fuel prices, is expected to lower our fuel bill below last year’s level.

“And lastly, while our fleet renewal is initially adding considerable expense for training and additional maintenance costs for aircraft exiting the fleet, we anticipate that additional sublease revenue in the second half of the year will partially offset this cost. Due to strong demand for used aircraft, two Airbus A340s and four Airbus A319s currently subleased to date are at rates higher on average than the original lease rates, as is the case for a further two Airbus A319s and eight Airbus A340s which are planned for sub-lease over the next 12 months. Agreements have been reached for the sublease of all Airbus A340s with high quality lessees at rates above the original lease, with the exception of two Airbus A340s on operating leases which will be returned to lessors in the fourth quarter of 2007.

“The quarter ended on a very positive note as the results of the world’s largest passenger survey, an independent poll of 14 million air travelers, ranked Air Canada as the Best Airline in North America. This most recent honor, coupled with sustained traffic growth and record loads is testament to the hard work of our employees who are successfully earning the loyalty of our customers to the new Air Canada.” ——-